The German energy association BDEW commissioned a NERA team led by Managing Director Tomas Haug to review the methodology specified in the German network charges ordinances to calculate the return on excess equity.*

Mr. Haug and NERA Consultant Lorenz Wieshammer prepared a report for BDEW that identifies network operators’ cost of debt as a relevant benchmark. The study provides several pieces of evidence:

• An empirical analysis shows that the actual cost of debt of European network operators will be consistently higher than the allowed return on excess equity in future.
• A review of precedent cases shows that excess equity is remunerated at a higher rate in other European countries.
• The allowed return on excess equity is inconsistent with the regulator’s treatment of debt interest costs despite the regulator’s assessment that excess equity should be remunerated at a rate akin to the cost of debt.

Mr. Haug and Mr. Wieshammer conclude that the current methodology leads to downwardly biased results. They suggest alternatives methodologies for calculating the return on excess equity.

*The share of equity that earns the return on equity is capped at 40% in Germany. If a network operator’s equity share exceeds this threshold, any excess equity is remunerated at the return on excess equity.